IFRS 18 (ii): management-defined performance measures, aggregation and the notes

Listen to almost any company results presentation and you will hear a profit figure that is not in the financial statements: “adjusted profit”, “underlying earnings”, “earnings before interest, tax, depreciation and amortisation (EBITDA)” (earnings before interest, tax, depreciation and amortisation). These numbers usually look better than the audited profit, and until now no standard controlled them.

International Financial Reporting Standard (IFRS) 18, Presentation and Disclosure in Financial Statements, brings the most important of them inside the audited statements, with a full reconciliation.

This topic covers management-defined performance measures (MPMs), the rules on grouping and labelling information, the notes, the effective date and transition, and how IFRS 18 changes the statement of cash flows under International Accounting Standard (IAS) 7. The previous topic covered the five categories and three subtotals. Together the two topics cover what the syllabus asks you to evaluate about the impact of IFRS 18.

Key terms in plain English

Syllabus check

This topic completes Syllabus Area F on IFRS 18:

• F6 the impact of IFRS 18 on the structure and presentation of the statements, including the notes and MPMs;
• F7 the rationale for the IFRS 18 structure and how it improves the structure of the statement of cash flows under IAS 7;
• transition and implementation, which the syllabus links to the other Area F items on changes in accounting regulations.

CAMA 2020 and performance measures

The Companies and Allied Matters Act 2020 (CAMA 2020) does not mention management-defined measures, but it controls the documents they appear in.

Management-defined performance measures

What is an MPM?

A performance measure is an MPM only if all four tests are met:

1. It is a subtotal of income and expenses.
2. It is used in public communications outside the financial statements, such as press releases, investor presentations and earnings calls. Purely internal reports do not count.
3. It communicates management’s view of an aspect of the entity’s financial performance.
4. It is not required or specified by IFRS. Operating profit, profit before financing and income taxes, profit and basic earnings per share are IFRS measures, so they are not MPMs.

What must be disclosed

All MPMs go in a single note. For each one the note must:

1. state that the measure reflects management’s view and is not necessarily comparable with other companies’ measures;
2. explain why it is useful and what aspect of performance it shows;
3. explain how it is calculated, and whether the method is the same from period to period;
4. reconcile it to the most directly comparable IFRS subtotal, showing each reconciling item separately, with the income tax effect of each item and the effect on non-controlling interests (NCI) of each item; and
5. if the measure is changed, added or stopped, explain the change and the reasons and restate the comparatives, unless impracticable.

Why it matters

MPMs are now audited and reconciled. That gives discipline, makes the adjustments visible, and discourages measures that flatter performance by leaving out normal costs.

Aggregation, disaggregation and labelling

• Aggregation. Combine items with similar characteristics when they are individually immaterial. Do not hide material information by combining.
• Disaggregation. Show separately items of a dissimilar nature or function unless immaterial, and break out information where it is useful.
• Offsetting. Not allowed for assets and liabilities, or income and expenses, unless a standard requires or permits it.
• Labelling. Line items need labels that faithfully describe them. Large amounts should not sit in an “other” line.
• Materiality. Only material information is presented. An item or note required by a standard need not be given if it is immaterial. If compliance is not enough to show the picture, add more.
• Primary statements and notes. The primary statements are more aggregated and the notes give the detail. A line may be one figure on the face and broken down in a note.

The notes

The notes include the basis of preparation (statement of compliance with IFRS, measurement bases, key assumptions and sources of estimation uncertainty), the accounting policies that matter, information required by other standards that is not on the face of the statements, the MPM note, and other information such as contingent liabilities and commitments. They should be organised in a logical order and cross-referenced to the line items.

Typical order: compliance and basis of preparation; material accounting policies; support for items in each primary statement in the order shown; other disclosures such as contingencies, commitments and related parties.

The effect on the statement of cash flows (IAS 7)

IFRS 18 amends IAS 7 to give a more consistent structure.

The reason is simple: the categories in profit or loss now line up with the categories in the cash flow statement, so a user can follow operating profit into operating cash flow. Banks and other entities with a specified main business activity have separate rules, because interest is part of their operations. Detailed cash flow preparation is covered in the later topics on IAS 7.

Transition and implementation

• Effective date: annual periods beginning on or after 1 January 2027. Early application is allowed and must be disclosed.
• Retrospective: comparatives are restated, and the opening statement of financial position of the earliest period if required.
• Relief: the entity need not disclose the adjustment to each line item or to basic and diluted earnings per share that IAS 8 would normally require.
• Steps: map income and expenses to the five categories, update systems and the chart of accounts, set policies on classification and any specified main business activity, identify the MPMs and prepare reconciliations, and train staff and explain the changes to the audit committee, investors and analysts.

Benefits for users: better comparability, transparency and decisions. Impact for preparers: system change, new disclosures, judgements about main business activity, MPM triggers and the best way to show expenses, and more audit scrutiny. Banks, insurers and investment entities are affected the most because of the classification exceptions.

The interaction with interim reporting is covered in the next topic, so check which IFRS 18 changes apply to interim reports if a question mentions them.

The rules in more depth

Why a ratio is not an MPM

The test is whether the measure is a subtotal built from income and expense lines. Return on equity divides profit by a balance sheet figure, so it is a ratio. It may still be misleading, but it is outside this note.

Why tax and NCI effects are required

An adjustment such as adding back a restructuring cost raises profit before tax, but the real effect on the owners is smaller after tax and after the share that belongs to NCI. Showing both stops the measure overstating what shareholders receive.

Why internal reports do not trigger the note

The idea is to control what the public is told. A measure used only inside the company does not mislead the market, so it is outside the note.

Why operating profit starts the cash flow

Before, companies began the reconciliation from profit before tax or profit, which mixed in items from other categories. Starting from operating profit removes investing and financing items from the starting point, so the adjustments are cleaner.

Worked example: building an MPM note

1. Which are MPMs? Underlying Operating Profit is a subtotal of income and expenses, is used publicly, shows management’s view and is not an IFRS measure, so it is an MPM. Return on Equity is a ratio using equity, so it is not an MPM.
2. Reconciliation.
   Operating profit ₦1,200m + restructuring ₦100m + goodwill impairment ₦60m = Underlying Operating Profit ₦1,360 million.
3. Tax effects.
   Restructuring: ₦100m × 30% = ₦30 million.
   Goodwill impairment: nil.
4. Effect after tax.
   Restructuring ₦100m − ₦30m = ₦70m.
   Goodwill ₦60m.
   Total effect on the owners’ profit = ₦130 million.
   Effect on NCI: nil.
5. The note. It states that the measure is management’s view, why it is useful, that it is calculated the same way each year, and gives the table above in a single note.
6. CAMA 2020. The note sits inside the statements that must give a true and fair view (s. 378), and the auditor can test the adjustments under the right of access in s. 407(3).

How to score full marks

• Apply the four MPM tests to each measure. A one-line verdict on each test is enough, and the failing test is the reason a ratio is out.
• Give the reconciliation in a table. Start from the IFRS subtotal, list each item, add the tax effect and the NCI effect.
• List the disclosures in order. Management’s view, usefulness, calculation, reconciliation, changes.
• For cash flow questions, give the table of starting point, interest and dividends, and the reason for the change.
• State the transition rules. 1 January 2027, retrospective, restated comparatives, relief from line-by-line disclosure.
• For an impact question, split users (comparability, transparency, decisions) from preparers (systems, judgement, audit scrutiny).

Common mistakes in the exam

• Calling return on equity or a gearing ratio an MPM.
• Forgetting the tax and NCI effect of each reconciling item.
• Scattering MPMs over several notes. There is one note.
• Saying operating profit and basic earnings per share are MPMs. They are IFRS measures.
• Believing that IFRS 18 leaves cash flows unchanged.
• Saying interest paid can still be classified as operating in an ordinary company.
• Forgetting that the comparatives are restated.

Quick revision

• MPM: subtotal of income and expenses, public communications, management’s view, not required by IFRS.
• MPM note: one note, management’s view, usefulness, calculation, reconciliation with tax and NCI effects, changes.
• Aggregation and disaggregation, no offsetting, good labels, material information only.
• Cash flow: start from operating profit. Interest and dividends paid in financing. Interest and dividends received in investing.
• Transition: 1 January 2027, retrospective, relief from IAS 8 quantitative disclosures.
• CAMA 2020: ss. 378, 385, 405, 407(3).

Practice questions

These are original questions written in the style of the Institute of Chartered Accountants of Nigeria (ICAN) exam. Try each one before you open the answer. Full model answers follow the written questions.

Recall check: multiple choice

The real ICAN paper has no multiple-choice section. These questions are for quick recall. The written questions that follow are closer to the exam.

Written questions

Model answers

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